J&J's nearly $17 billion offer to buy a heart pump maker goes right to why we own it

Published Tue, Nov 1 20221:41 PM EDT

Johnson & Johnson 's (JNJ) $16.6 billion deal to buy heart pump maker Abiomed (ABMD) will bolster its pharmaceutical and medical device business ahead of J & J's plans to separate its consumer division into a separate company. The Abiomed acquisition is set to close at the end of the first quarter of 2023. The spin-off of J & J's consumer business, including such brands as Band-Aid and Tylenol, is expected in November of next year. Bottom line The new standalone J & J consumer company will be called Kenvue . The break-up will allow the remaining company, which will keep the Johnson & Johnson name, to increase its focus on its Biopharmaceutical and Medical Device Innovation and Technology businesses. The Abiomed transaction is in line with this initiative and will strengthen Johnson & Johnson's ability to address the unmet need for innovation in heart failure and recovery while accelerating long-term sales and earnings growth. We like the transaction as it strengthens the core of our investment thesis — an intensified focus on the fastest-growing segments of JNJ, specifically MedTech in this case. As a reminder, J & J's MedTech unit reported operational growth of 8.1% globally in the third quarter. That's certainly a respectable growth rate, but not quite the 10% to 14% sales growth (up 13% to 17% in constant currency basis) that Abiomed guided to for fiscal year 2023, when the company released fiscal first-quarter 2023 numbers back in early August. Put simply, the addition of Abiomed will serve to accelerate the growth rate of J & J's MedTech unit and should, in theory, lead to a higher valuation as investors tend to reward growth with multiple expansion. The Abiomed transaction, which will be financed with J & J's cash on hand and short-term financing, is expected to be negative-to-neutral for earnings next year. In 2024, J & J expects the acquisition to add roughly 5 cents to its per-share earnings and to be what the company describes as "increasingly accretive thereafter." Valuation While the valuation being paid is not cheap at roughly 16-times fiscal year 2023 Abiomed sales estimates, Johnson & Johnson has the financial capacity to get it done without taking on too much debt. The amount paid represents a little over half of J & J's expected earnings before interest, taxes, depreciation, and amortization (EBITDA) for fiscal year 2022. In the long-term, we believe the transaction will prove to be a better investment t